VC Perspectives from a Former Entrepreneur – Jeff Bussgang

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Monthly Archives: September 2005

While attending this week’s CMO Perspectives conference, I was reminded of Tracy Kidder’s famous 1981 book, The Soul Of A New Machine. Why did a conference of Chief Marketing Officers, showcasing brand reinvigoration efforts at McDonalds and Dove (whose "Real Beauty" campaign I absolutely love, by the way), remind me of a geeky cult hit about the development of Data General’s latest big iron machine?

Simply put, all the talk about brand attributes and personality reminded me of the importance of "soul" in a start-up.

Keynote speaker Charlotte Beers (who had great stories about her experience in Washington when she was tapped by Colin Powell in October 2001 to run the US PR campaign in Arab countries after a long Madison Avenue career running Oglivy & Mather and J. Walter Thompson) talked about the importance of company executives, particularly CMOs, personifying the brands of their companies. Although the CMOs of Pepsi and WalMart, who were in the room, took her advice as very relevant to their global branding efforts, it struck me as even more critical to the little start-ups we VCs deal with every day in a very different way.

VCs tend to approach start-ups with cool, analytical rigor to get to the bottom line answer: "Will this make me and my limited partners money?". Entrepreneurs tend to approach start-ups with extreme emotional attachment beyond any rational borders, seeking the answer to the question: "Will anyone love and appreciate my [professional] baby (which, by the way, I hope makes me money so I can retire and get back to spending time with my family)?" Anyone who’s been involved in starting a company knows what an incredibly emotional adventure it can be. The ups and downs are incredibly exhilirating yet terrifying. One moment you’re king of the world, the next you’re afraid you’re going to run out of money, and then it flips again. The tension between that emotional roller-coaster that the founders/insiders are feelings as compared to the cool, analytical perspective of the rational VC/outsiders is an extremely healthy one – over-weighting one side or the other will result in a sub-optimal company-creation process.

And it is that tension that gets to heart of the concept of the soul of a company. You don’t have to be a religious person to appreciate that every start-up has a soul. Webster defines the word as "the immaterial part of a person". The soul of a start-up is thus the immaterial part of the company that personifies its unique character and culture. The soul of a company typically comes from the founding team, although I have also seen it come from mid-level hires, often young, who so completely embrace the company’s mission that they begin to deeply eminate it in all of their activities.

The importance of nuturing the soul of a new company can’t be under-estimated, but can be very difficult as the start-up grows and evolves. Too often, that soul can erode when VCs come in to start-ups and begin to engineer the process of bringing in the "grown ups" (by the way, how old do you think you have to be to be considered a grown up at a start-up?). If the board and management team aren’t careful about preserving the soul of the company during growth, "grown-ups" and founder transitions, the company can easily lose its way. Perhaps not on a rational level (strategy, finance, products), but on an emotional one (culture, passion, commitment).

Think of a start-up. Now picture who represents the "soul" of that start-up. It’s probably a pretty easy exercise. Now imagine that person missing from the start-up. Ouch.

Nurturing and evolving the sould of the start-up is as critical a part of the stewardship of the company as nurturing the product strategy. Boards and founders shouldn’t be afraid to use this emotional language when describing what they are creating. After all, it is how they are feeling.

Like this:

It’s the end of summer, so I’m trying to get some last-minute summer reading done.Like many people, I try to pick a few books that take me away from my day-to-day job.Unfortunately, I just read a book that had the opposite effect:Blink by Malcolm Gladwell (author of The Tipping Point).This book kept bringing my mind back to the VC business.

First, a quick summary of the book.Blink’s thesis is that human beings make intuitive decisions very quickly, often without consciously thinking or knowing why analytically.Many times, these decisions are dead on as the brain subconsciously, rapidly absorbs and processes vast amount of observed data.One amusing example the book provides is a psychologist who can observe a married couple for 15 minutes and with a 90% success rate, predict whether they will still be married in 15 years (begging the question of who would be crazy enough to run a 15-year longitudinal study!You can imagine the phone call:“Hello?Is this Susan?Hi Susan, Dr. Gottman here.Yes, yes, we spent time together at my lab 15 years ago?I just wanted to know if you’re still married to Bob.Oh you’re divorced?Wonderful!Just as I predicted…uh…I mean, I’m so sorry for both of you.Thank you very much.Goodbye”).

To be fair, Gladwell also points out that at times these unconscious decisions can be very wrong.As another psychologist notes:“When we make split-second decisions, we are really vulnerable to being guided by our stereotypes and prejudices.”

Now why did this make me think of the world of VC?

Simply put, VCs blink all the time.Ask your VC friends how long it takes them to decide whether a deal will be a good one in a first meeting or call.Typical answer:15 minutes.How long does it take them to decide whether an interview candidate is an “A” player worthy of an executive position in their portfolio companies?15 minutes.Everything else is just to fill the time.

You see, although many VCs are typically fairly analytical, particularly those with private equity backgrounds, by and large the VC investment business is an intuitive one.When analyzing companies without a historical track record pursuing nascent, emerging markets, VCs must heavily rely on their intuition.When assessing executives without long track records as successful CEOs or department VPs (i.e., young, up and coming and therefore, typically unproven executives), VCs again must heavily rely on intuition.

Test it out.If you’re pitching a VC or interviewing with them, challenge yourself to get through your opening pitch in 15 minutes and then pause.Sit back, look them in the eye, and say:“Let’s hit the pause button.Based on what you’ve heard so far, what do you think?I don’t want to waste anyone’s time if you think this would not be interesting.”I bet you very few VCs will say, “tell me more – I haven’t formed an opinion yet.”The honest ones will say:“This is really interesting” or “I’m sorry, this isn’t a good fit – I can tell already”.

And what about the bias issue?What to make of the insightful comment that intuitive, unconscious opinions and decisions play to stereotypes and biases?Unfortunately, that’s another factor in the VC business that entrepreneurs need to take into account.If they wish to break out of the bias, entrepreneurs need a break out approach to their pitch.Imagine a prospective CEO with a spotty track record starting off an interview by saying:“Look, I know I’ve worked for three failed start-ups in a row, but let me tell you what I’ve learned from that experience and why I would make an outstanding CEO.”That would be a refreshing way to start an interview!

Finally, entrepreneurs should know that there are no hard feelings if their 60 minute pitch slot ends after only 15 minutes.The VC will respect them all the more for being efficient and straightforward rather than dragging out the inevitable.